The IRS taxes interest your savings account earns, not the money you deposit
Money you put into a savings account is not taxed — that is your own money. But interest that the bank pays you on that balance is taxable income. The IRS treats it the same way it treats wages or investment dividends. You owe federal income tax on it, and depending on your state, you may owe state income tax as well.
The bank reports this interest to the IRS on a Form 1099-INT if you earned $10 or more in a calendar year. You receive a copy, and the IRS receives a copy. You then report that interest on your tax return, usually on Schedule 1 (Form 1040). The tax you owe depends on your overall income and tax bracket — there is no flat rate.
The key point: the interest is taxed in the year you earn it, even if you do not withdraw the money. If your account earned $50 in interest in 2024, you owe tax on that $50 in 2024, whether the money sits in the account or you move it.
Key Takeaways
- Banks report interest earnings of $10 or more on Form 1099-INT, which goes to both you and the IRS.
- Interest is taxed as ordinary income at your marginal tax rate, not at a special savings rate.
- You owe tax on interest in the year it is earned, regardless of whether you withdraw it.
- High-yield savings accounts earn more interest but also generate higher tax bills unless held in tax-advantaged accounts.
- Certain accounts like Roth IRAs and 529 plans shield savings interest from federal tax, subject to contribution limits.
When the bank sends you a 1099-INT form
Your bank will mail or email you a Form 1099-INT by January 31 of the year following the one in which you earned the interest. This form shows the total interest paid to your account during the previous calendar year. If you have multiple savings accounts at different banks, you will receive a separate 1099-INT from each one.
You are required to report this interest on your federal tax return even if you do not receive the form — the IRS has a copy. If you file and do not report the interest, the IRS will notice the mismatch and may send you a notice of underreported income. It is simpler to report it when you file.
If you earned less than $10 in interest across all your accounts at a single bank, that bank may not issue a 1099-INT. However, you still owe tax on that interest if your total income requires you to file a return. Keep your own records of interest earned.
How much tax you owe on savings interest
The tax rate on savings interest is not fixed. Instead, it is taxed as ordinary income, which means it is added to your wages, self-employment income, and other sources of income, and then taxed at your marginal tax rate. If you are in the 22% tax bracket, interest is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.
Federal tax brackets change each year and depend on your filing status (single, married filing jointly, head of household, and so on). A single filer in 2024 in the 22% bracket earns between roughly $47,150 and $100,525. The exact thresholds shift annually.
On top of federal tax, you may owe state income tax on the interest. Most states tax interest income the same way the federal government does — as ordinary income. A few states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) do not have a state income tax at all. New Hampshire and Tennessee tax only interest and dividend income, not wages.
High-yield savings accounts and tax liability
A high-yield savings account earns significantly more interest than a traditional savings account — often 4% to 5% annually, compared to 0.01% or less at many large banks. This higher rate means a higher tax bill. If you have $50,000 in a high-yield account earning 4.5%, you will earn roughly $2,250 in interest per year, and owe tax on all of it.
The trade-off is worth considering. You earn more money, but you also owe more tax. If you are in the 22% federal bracket plus, say, 5% state tax, you will owe about 27% of that interest to taxes — leaving you with roughly $1,643 after tax. That is still far better than the $5 you would earn in a traditional savings account at the same balance.
High-yield accounts are still taxable accounts, meaning the interest is reported to the IRS and you owe tax on it. If you want to avoid or defer tax on savings, you need a tax-advantaged account.
Tax-advantaged accounts that shield savings from tax
Certain accounts allow you to earn interest without owing federal income tax on it, at least in the short term or under specific conditions. These include Roth IRAs, Roth 401(k)s, 529 education savings plans, and Health Savings Accounts (HSAs).
A Roth IRA lets you contribute up to $7,000 per year (or $8,000 if you are 50 or older in 2024), and all interest and investment gains grow tax-free. You never owe federal tax on the earnings, provided you do not withdraw them before age 59½ and the account has been open for at least five years. Contributions to a Roth IRA are made with after-tax dollars, meaning you do not get a tax deduction for putting the money in.
A 529 plan is designed for education expenses. Interest and gains grow tax-free, and withdrawals for may have access to education costs (tuition, fees, room and board, books) are not taxed. If you withdraw money for non-education purposes, you owe tax on the earnings portion plus a 10% penalty.
An HSA is available only if you are enrolled in a high-deductible health plan. You can contribute up to $4,150 per year (individual coverage) or $8,300 (family coverage) in 2024. Interest grows tax-free, and withdrawals for may have access to medical expenses are not taxed. Unlike a 529, an HSA can be used for any purpose after age 65 without penalty, though non-medical withdrawals are taxed.
What happens if you do not report savings interest
The IRS receives a copy of every 1099-INT your bank files. If you do not report the interest on your tax return, the IRS will eventually notice. The mismatch triggers a computer match, and you will receive a notice of underreported income, usually several months after you file.
You will owe the tax you should have paid, plus interest on that unpaid tax (currently around 8% per year), and potentially penalties. The penalty for negligence is 20% of the underpaid tax. If the IRS determines the underreporting was intentional fraud, the penalty can be as high as 75%.
Reporting the interest when you file is far simpler and cheaper than dealing with an IRS notice later. If you made an error on a prior return, you can file an amended return (Form 1040-X) to correct it before the IRS contacts you.
Frequently Asked Questions
Do I have to report interest if I earned less than $10?
The bank does not have to send you a 1099-INT if you earned less than $10, but you still owe tax on the interest if your total income requires you to file a return. Keep your own records and report it on your return.
Can I deduct savings account fees from the interest I report?
No. You report the gross interest the bank paid you. Fees are not deductible against interest income. However, if you paid investment advisory fees or other expenses to manage taxable investments, those may be deductible under certain conditions — consult a tax professional.
What if I move money between savings accounts during the year?
Only the interest earned is taxable, not the principal you move. Each bank reports interest earned on accounts you held during the year. Moving money does not change the tax treatment of the interest.
Is interest from a joint savings account split between the owners for tax purposes?
The bank reports the full interest amount on a 1099-INT. How you and the other owner split the tax liability is between you — the IRS does not automatically split it. You should agree on how to report it and keep records of that agreement.
Do I owe tax on interest if I am a minor?
Yes. A minor with earned interest must report it on a tax return if the amount exceeds the standard deduction for that year. A parent or guardian may be able to claim the minor as a dependent, which affects the minor's filing requirement, but the interest is still taxable to the minor.